Budget Planning
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Chapter 12: Budget Planning
1
Budget Management
Importance
Estimating costs to compare and select
Methods of Estimating
Managing the Budget
Budget timeline
Budget variances
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Project Management
Chapter 12: Budget Planning
Importance of budget planning
Cost is one of the three project constraints
A budget is a plan or forecast
Cost management also includes tracking and managing variances from the planned expenditures
Detailed estimates are important
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Project Management
Chapter 12: Budget Planning
Estimating costs to compare and select projects
Payback, rate of return or NPV (or combine them)
Need accurate numbers but must balance with the cost of getting more accurate estimates
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Chapter 12: Budget Planning
Estimating methods
Analogous estimate
Find a similar project or task and assume this one will be the same or similar
The more experience the estimator has, the better this works
Learn from each project
DPCI (Darnell-Preston Complexity Index) can help with benchmarking
Parametric estimate
Parameters such as number of square feet for a building; number of kitchens, bathrooms, etc. for a house.
Bottom-up estimating
Estimate each item or task and add them together
Generally more accurate but takes more effort to create
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Chapter 12: Budget Planning
Estimating Guidelines
Don’t gold-plate: estimate what you expect, and meet that estimate.
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Project Management
Chapter 12: Budget Planning
Managing the Budget
Cash flow
Make a plan of WHEN the outflows will occur, and ensure that the money is available on time
Contingency reserves
For unexpected expenses that arise during the project
There are almost always some surprises, but can’t predict at the start what it will be
Project Manager does not allocate to the sub-projects but manages it centrally
Can be spent and still be within the original project budget
Management Reserves
For scope changes
Not likely to be spent; not part of project baseline
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Chapter 12: Budget Planning
Reporting Progress: Earned value management
| Budgeted Cost of work Scheduled | BCWS | Detailed estimates for each activity in the project |
| Planned Value | PV | Total budgeted cost as of a certain date in the project |
| Earned Value | EV | Budgeted cost of the completed work as of a certain date in the project |
| Actual Cost | AC | Actual cost of the completed work as of a certain date in the project |
| Budget at Completion | BAC | Total budgeted costs for the entire project |
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Chapter 12: Budget Planning
Project Cost Chart
BAC
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Project Management
Chapter 12: Budget Planning
Budget BaselineFebruaryMarchAprilMayJuneJuly100001200022000300004000045000
Budget Baseline and Project Cost Chart
The project budget is usually shown graphically, illustrating the cumulative planned spending.
Typical shape for the budget curve is s-shaped, with less spending at the beginning and end of the project.
Add the periodic expenditures on a regular basis to create the Project Cost Chart.
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Project Management
Chapter 12: Budget Planning
Project Cost Chart (up to May)
BAC
AC
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Chapter 12: Budget Planning
Actual ExpendituresFebruaryMarchAprilMayJuneJuly500070003000035000Budget BaselineFebruaryMarchAprilMayJuneJuly100001200022000300004000045000
Schedule Variance: SV
Difference between planned and actual progress
SV=EV-PV
Positive value: project is ahead of schedule
Zero: project is on-time
Negative: project is behind schedule
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Project Management
Chapter 12: Budget Planning
Cost Variance: CV
The difference between the earned value and the actual cost is the cost variance:
CV=EV-AC
If positive, you are achieving more than you predicted for the money
If zero, you are right on the plan
If negative, you are achieving less than you predicted for the money
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Chapter 12: Budget Planning
Schedule Performance Index: SPI
Compares progress on the scope to spending:
SPI = EV/PV
SPI less than one indicates the project is behind schedule
SPI of one is right on schedule
SPI greater than one the project is ahead of schedule
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Project Management
Chapter 12: Budget Planning
Cost Performance Index: CPI
Compares the budget spent to date with progress to date:
CPI=EV/AC
A value greater than one: under budget
Equal to one: on budget
Less than one: overspending the budget
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Project Management
Chapter 12: Budget Planning
Estimated Cost to Complete the Project: ETC
Formula to use depends on what the PM expects with regard to future project costs and whether the original budget assumptions remain valid
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Project Management
Chapter 12: Budget Planning
ETC if past variances are not expected to continue:
ETC = BAC – EV
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Project Management
Chapter 12: Budget Planning
ETC if past variances are expected to continue at the same level
ETC = (BAC – EV)/CPI
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Chapter 12: Budget Planning
Estimated Final Project Cost: EAC
EAC = ETC + AC
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Project Management
Chapter 12: Budget Planning
Budget Timeline
Contractual agreements often require partial payments
Prepare a schedule, based on contractual and other expenditure requirements
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Project Management
Chapter 12: Budget Planning
Budget Management Summary
Cost estimations may be used to choose between options
Managing the budget includes
Estimating costs and setting a budget
Determining when the budgeted costs should occur
Tracking expenditures
Managing variances between the budget and the expenditures
Methods of Estimating
Analogous, Parametric, Bottom-up
Managing the Budget
Budget timeline
Budget variances
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Chapter 12: Budget Planning
Budget Management Summary (continued)
Budgeting and Cost Management are important activities for project managers
There are several methods for estimating the costs
Estimated costs may be used to choose between options
Project progress and budget management are closely related and can be managed with indices: BCWS, PV, SV, AC, CV, SPI, CPI, ETC, BAC and EAC
Contingency funds allow for the unexpected
Reporting to the team and to management are important components in budget management
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Chapter 12: Budget Planning
Questions?
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Chapter 12: Budget Planning
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